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Wide Eyes at Alcon

Eye care is one of the least-contended subsegments of the health-care market. Big players would rather fight for market share in stents, ICDs, or depression drugs than take on eye-care drugs or devices. Perhaps that's a testament to Alcon's (NYSE:ACL) strength, because I don't think anybody can look at this company's results and believe there isn't money to be made in treating eyes.

The further you go down the line items, the better Alcon's third-quarter results look. Sales were up nearly 12%, but gross margins expanded by nearly 300 basis points. The company also tightened up its operating expenses, and operating income climbed nearly 33% year over year as the operating margin grew from 28.9% to 34.3%. This performance was magnified by a low tax rate in the quarter, all of which helped net income climb more than 52% year over year.

Sales growth was uneven across the major product groups, though I wouldn't necessarily call that a bad thing. Pharmaceutical sales were up more than 16% on good glaucoma and inflammation/infection sales, while surgical revenue rose more than 10% as good performance in intraocular lenses offset a steep decline in the refractive business. Bringing up the rear, consumer eye-care revenue was up just a bit more than 4% as strength in artificial tears couldn't outweigh declines in contact lens product sales.

Although the company doesn't appear to be counting on another fantastic performance in the next quarter, the overall growth picture looks pretty strong. Alcon has a great intraocular lens business, and the relatively recent approval of its new ReSTOR Natural product will augment that. Moreover, the company is looking to increasingly penetrate Japan -- a lucrative but sometimes tricky market for foreign health care companies. Lastly, Alcon has some high-risk products in the pipeline (like Retaane) that may have below-average chances of approval but would nicely boost performance if they do make it to market.

Alcon -- in which Nestle holds a majority interest -- is well ahead of rivals like Allergan(NYSE:AGN) and Bausch & Lomb(NYSE:BOL) in terms of revenue, market cap, valuation, and recent stock performance. This is a strong and valuable cash-producing franchise, and it deserves a premium valuation -- but how much of a premium? While the P/E-to-growth ratio (PEG) is a somewhat blunt instrument, I do find it interesting that Alcon's is around 2, while Medtronic(NYSE:MDT) is at 1.5 and Pfizer(NYSE:PFE) is at 1.7. With that it mind, I wouldn't sell it if I owned it, but I'm not sure I'd be in a big hurry to jump in, either.